Stock Market Update – 01/29/12 © ™

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WHOOPS

My last update had nothing new included, just the normal everyday stuff that is always included.  I was preparing for today’s post and tagged the wrong button.  Sorry about that.

Every time I put a new file (pdf) in my blog an update goes out automatically.  That’s not intentional just the way wordpress does things.  So I apologize in advance if I upload 5 files in one day and 5 updates go out.

CYCLES

I haven’t posted the charts for the cycles since 1/18 and today I’ll show you what’s happening.

Two of the three charts show that we should be bottoming presently.  That’s still possible with a quick deep correction and next week should tell us if that’s going to happen.  Whether the correction is invisible (very good sign) or it will occur in February remains to be seen.

If the correction is practically invisible, it will indicate that a larger cycle has dominance (good sign).  The 1950 dataset shows a February bottom but that factors 60 years of data and doesn’t put emphasis on recent cycles like the dataset 1998 and 2007.

The next cycle of real significance is indicated for March (1950 dataset) or May (1998 and 2007 dataset).  The 1950 dataset shows an 18 month cycle bottom in March, while the 1998 and 2007 dataset show that the 18 month cycle bottomed last October.  If we have a significant correction into February that takes us into the area of the October lows, it will likely indicate that the 1950 dataset is correct.  That isn’t my favorite outlook but I don’t get to choose what the market does (nuts).  The market is very overbought and a correction of some type should take place to replenish the market’s firepower.  It’s always possible that we could see nothing more than 1-3 day corrections with a resumption of the rally.  That’s really great market action if it continues.

The following charts are the datasets 1950, 1998 and 2007, in that order.

01/29/12 1950 to present dataset cycles

01/29/12 1998 to present dataset cycle

01/29/12 2007 to present dataset cycle

MISC

Jeffrey Saut mentioned Linn Energy (LINE) on his Thursday update.  I hadn’t looked at it before but it pays a 7.5% dividend, has an excellent growth record and is constantly making acquisitions.  Jeffrey said this is the stock he recommends to friends and family to put away for a few years.  Of course if oil prices don’t rise, LINE wouldn’t do well.  Presently the oil  price chart shows that oil is in an inverse head and shoulders formation (see my charts page 13, #71.6).  This hasn’t been confirmed by a neckline breakout but the projected rise is to approximately $113 per barrel.  This isn’t a recommendation because I don’t do that, just take a look.  My normal field of play is the stock index futures where I’m very careful to NOT become over-leveraged (been there, done that).

CONFIDENCE INDEX

The following is the confidence index (junk bonds divided by treasury bonds).  Although the index is rising, the curious and bothersome part about this chart is the index has not risen above it’s October high.  Another problem is that various market indexes are approaching their May 2011 highs and the confidence index is far away from it’s 2011 high.  When the market expects a recovery, junk bonds will rise much faster than treasury bonds.  That is barely happening at the present.  The lower part of this chart is the Value Line Arithmetic Index.  Did you realize that this index hit an all-time in March 2010 and kept right on rolling.  It’s present all-time high was May 2011.

01/29/12 Confidence Index

ECONOMY

The following chart gives indication for the economy in real-time.  The last chart is the Baltic Dry Index, which is the cost of ocean shipping.  When the economy is rolling in high gear, this index will be at high levels and the reverse is also true.  Presently, this index is very near the lows made in December 2008.  You can draw your own conclusions on that one.

01/29/12 Economy

Another chart real-time chart for the economy is the Aruoba-Diebold-Scotti Business Conditions Index, which is kept by the FED.  It shows conditions rising slightly.  The past record of this index has been pretty good.

01/29/12 Aruoba Diebold Scotti Business Conditions Index

Although I’ve had some negative things in this post, I remain in an “overall” uptrend theme as per previous updates.  This is based on my wave counting techniques and we should keep in mind that the market always climbs the “wall of worry”.

CHARTS

  • These are my personal charts and my playground for doodling trend lines, wave counts and other ideas.
  • I draw the trend lines and wave counts on a daily basis (sometimes more often).  You can find these doodles from 1 minute to monthly charts.
  • I usually restrict my trend lines and wave counts to the first three charts on each page, TSX, DJI & COMPQ.  The other charts on the page are usually for confirmation of the trend and wave structure.
  • Page 1 – Buy/Sell Signals & Misc Charts
  • Page 2 – Indexes With 1 Minute Bars
  • Page 3 – Indexes With 5 Minute Bars
  • Page 4 – Indexes With 15  Minute Bars
  • Page 5 – Indexes With 30 Minute Bars
  • Page 6 – Indexes With 60 Minute Bars
  • Page 7 – Indexes With Daily Bars
  • Page 8 – Indexes With Weekly Bars (since 1981)
  • Page 9 – Indexes With Monthly Bars (since 1981)
  • Page 10 – Indexes With 60 Minute Bars, Candlestick
  • Page 11 – Indexes With Daily Bars, Candlesticks
  • Page 12 – Indexes With Weekly Bars, Candlestick
  • Pages 13 through 14 are shorter term indicators.  The indicators are used to simply look for some type of leading action before a turn or confirming action of the wave count.  Page 13 is a look-everyday indicator page.  The other indicator pages are less frequently visited.
  • Page 15 – Hurst FLD Projections
  • Page 16 – Indicators, Long Term
  • Page 17 – International Indexes
  • Page 18 through 30 are sector ETFs.  They represent most of the active sector ETFs and are always a good hunting ground when looking for something that is breaking in a new direction.
  • Page 31 through 46 are growth stocks with indicators.  These are stocks that have been in a lengthy uptrend.  One qualification is that they must not be severely damaged in a bear market so they can’t rise to significant new highs in the following bull market.
  • The growth stocks show daily market action for the last 1.5 years and weekly prices since 1992.  This gives a good perspective of how they have behaved in the immediate past (daily charts) and how they behaved during good and bad times (weekly charts).
  • Page 46 – Last 6 charts are trades from the mechanical sell/buy signals

WAVE COUNTS SIMPLIFIED

  • My wave counts are not Elliott Wave!  It’s different, simple and functions without a maze of exclusions.
  • There are 3 peaks (or valleys) to a completed wave count. A reversal of trend takes place after a completed wave count.   Often times it’s as simple as counting 3 bumps (or dips) on a chart . . . Other times, not so easy.
  • In a downtrend the same rules apply except you are counting 3 dips instead of 3 bumps.
  • 3 steps must stay confined to a channel.  Laying a pen or pencil on the chart will help you visualize the channel.
  • As the larger trend progresses, all of the steps that make up the trend will also be confined to a larger channel.  Sometimes a channel is not clear until the surge phase (vertical move) has ended.
  • When the market breaks its channel (regardless of the perceived wave count), the step has been terminated.  (Make sure your channel was correctly drawn before calling a termination).  Sometimes this may be your best indicator that a wave count is completed.
  • The correction following the second step is larger than the correction that followed the first step, and obviously the correction following third step is larger than the second step correction.
  • A single wave may sub-divide into another 3 waves.  I will call this an extension.  When this happens (1) the trend is still intact, (2) the channel will widened and (3) instead of a total of 3 steps, there will be 5 steps.
  • Sometimes I will use the terms “step” and “wave” interchangeably.
  • Reading the glossary helps in the understanding of this blog.  There are many other important facts in the glossary.
  • Glossary Link

ABBREVIATIONS

  • DJI = Dow Jones Industrials
  • DJT = Dow Jones Transportations
  • SPX = SP 500
  • ES = SP 500 Futures
  • COMPQ = Nasdaq Composite Index
  • TSX = Toronto Stock Exchange (Canadian blue chips)
  • SOX = Semiconductors
  • TXX = Technology

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  • Long Term – UP
  • Uptrend
  • Mar 2009 To Present
  • Step 2 Up (of 3) Completed
  •  Step 3 Up Has Possibly Begun
  • From the bottom in  March 2009
  • Large step one up ended in May 2010
  • Large step two up ended in May 2011.
  • Significant break above the May 2011 highs should signal that Step 3 up is official

12-28-11 LONG TERM

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  • Very Long Term – DOWN
  • Downtrend
  • Jan 2000 To Present
  •  Step 2 Down (of 3) Completed
  • Currently In Rally Phase From Step 2 Down

12-28-11 VERY LONG TERM

VERY LONG TERM COMMENTS

We have 3 possibilities for the future.

  • We have entered a very wide swinging market (megaphone formation) similar to that of 1966 to 1974. During that era we had three bear markets with two intervening bull market rallies.  Each bear market had a lower low than the previous bear.  The intervening bull market rallies saw new all time highs before the next bear market began.
  • We also have formed a huge head and shoulders formation since 1998.  If this formation is valid, the downside measurement calls for a bottom around Dow Jones Industrials 1,000.
  • We began a long term bull market in March 2009.  Each subsequent min-bear market will result in higher lows than the prior major low.
  • I favor the megaphone formation as the most likely scenario.

Since 2000 we have had two bear markets, 2000 to 2003 and 2007 to 2009. Like 1966 to 1974, the recovery from the first  bear market saw a new all time high (2007 peak). It’s possible that we may experience another all time high during the present recovery period.  This would support the megaphone formation.  A failure to make new highs would support the head and shoulders argument.  In both formations the conclusion of the present recovery would call for a third and final bear market. An estimated time for the conclusion of the final bear market is approximately 2018.

The lesser downside target of both formations is the megaphone formation as it likely calls for a bottom 1,000 to 2,000 points below the 2009 low, which would be around Dow 5,000.

In the head and shoulders formation the measurement calls for a bottom around Dow Jones Industrials 1,000.  This is almost an unimaginable event regarding the possible fundamentals to create this scenario.  If this did happen, everything that could go wrong would have to go wrong.  The reasons range from the absurd to the absurdly absurd.  This scenario is so dark that it doesn’t seem possible but nevertheless, the head and shoulders formation is there and will be waiting until we pierce the all-time highs of October 2007.

Remember these are simply possible scenarios and are not embedded in fact.  Whatever the outcome, it never hurts to be a little cautious with some of your money.  But in the worst case scenario, everything that we take for granted as being safe . . . .  would not be safe.  This is something to never forget in the event things go very badly.

Hopefully we will never have to think about worst case scenarios other than to have a good laugh at them presently.

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EDSON GOULD

  • Edson Gould, Premier Stock Market Strategist – Edson Gould had a profound influence on the development of my techniques and  indicators.  Prior to me subscribing to his advisory service, I was just one of the crowd.
  • After 40 years I still have many of the publications from his advisory service, “Findings & Forecasts”.  Fearing the loss of these hard copy reports I have recently scanned and created pdf files of these reports.  Now I have hard copies and computerized versions of the reports.
  • I have used a technique of his that I found in an obscure reference in one of his reports.  It was only mentioned once and never again.  I believe that he used this tool extensively and never told the world it’s importance.  Prior to my finding this tool, I had been trying unsuccessfully to find a different way to chart the market.  When I read about his technique I knew instantly that this was exactly what I had been seeking.  I have charted this method back to 1939 and found it to be very useful.  There is no mention of it in the reports that I posted below as I have deleted any reference to it.  It’s a super secret indicator and I’d have to kill you if I told you about it.
  • Edson Gould was truly a legend in his own time.  It’s too bad that today most people have forgotten or never heard of him or his discoveries.  Below you will find only the first page of these reports.  A teaser is what you might call it.  The rest of the reports are available upon request.  This is a man that deserves to be remembered throughout technical analysis market history.
  • The following are links to Edson Gould reports.
  • My Most Important Discovery by Edson Gould
  • It was also my most important discovery, for it explained the irrational volatility of markets that had mystified me in my early years.  During those early years I found nothing worked in predicting these irrational market swings.  But the fog lifted after reading this report and I began to understand how to begin predicting the market.
  • Edson Gould’s 1974 Forecast
  • Gould’s 1974 forecast kept me bearish and short throughout 1974 until the week before Christmas 1974, during which I began making long term purchases.  After that it was ride the bull phases that transpired from 1975 to 1982.  1982 to 2000 was the greatest bull market of all time.
  • Edson Gould’s 1975 Forecast
  • Edson Gould’s 1976 Forecast
  • Edson Gould’s 1977 Forecast
  • Edson Gould’s Five Year Forecast 1977 to 1982
  • This was a remarkable forecast in 1977, where the Dow Industrials had never been higher than 1,000. NO ONE predicted a rise of this magnitude in 1977.  Most were waiting for a resumption of the bear market.
  • As part of the 1977 to 1982 forecast: On Wednesday August 4, 1982 I went long the market for the first time in months.  By Friday, August 6 I was worried that I had made a mistake as I was deep in the red (I was long the Kansas City Stock Market Contracts).  The Kansas City Stock Market Contract was the first of the stock index contracts (February 1982).  It was based on the Value Line Arithmetic Index, margin requirement were quite low, and it had a multiplier of 100 times the Value Line Arithmetic Index, which meant the leverage was very high.  On Friday (Aug 6), my wife and I went to dinner and I told her my tale of woe and whether I should sell my long positions.  I explained that my key indicator had reversed and continued higher on Thursday and Friday but the market had continued lower.  Since the key indicator was usually correct, we decided to stick it out for a few days more (I was crazy in those days).  My key indicator was mentioned by Gould only once in his market letters.  If you didn’t catch its importance, too bad, because he only gave you a peek.  Prior to Gould writing about this indicator I had been looking for one that had similar characteristics without success.  Thus when Gould wrote about it, I recognized instantly that I had struck gold.  I have modified this indicator slightly and researched it back to 1939.  This was a lot of work as it was before computers and online data (remember when Barrons was available only on paper, still is for the distant past).  Meanwhile on Monday August 9, 1982 the market took off like a rocket and never looked back.  I skyrocketed out of the red and had a big profit.   In August 1982 the only people that were bullish were Edson Gould, Robert Prechter and myself (probably a couple of others but I didn’t know them).  Everyone else was extremely bearish.  It was a perfect example of crowd behavior.

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TRANSACTION SIGNALS

  • All actionable signals are only for short term time frames.  These signals are not designed for intermediate or long term time frames BUT . . . . .
  • After a short term buy signal, long term tax status  can be achieved by a continuation of the upward trend, which causes short term actions to morph into long term holdings. 
  • See more details in the glossary under “Taxes, Futures Contracts” and “Money Management”.

TRANSACTION RECORD

  • In this blog a warning of an impending bottom (or top) is often issued well in advance of the formal buy or sell date.  This allows thoughtful consideration prior to a formal action signal.  To get a sense of how this works, you should read a few days prior to a formal buy/sell signal.  I often buy/sell in my personal account based on the early warnings.
  • The transaction record near stock market bottoms will show that I am very skittish and usually remain so until the new direction is well underway.

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MISCELLANEOUS

  • There are useful items throughout this blog.  For instance, the “Wall Street Quotes” can be very instructive.  So make sure and look all through the blog.

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